Card Game: Visa Uses Fees to Rule Market

(AP/John Terhune, Journal & Courier)
Signature or PIN? A query to customers who swipe at checkout can actually means increased fees from merchants to the card company, increased payments to banks, and — not surprisingly — passed-on costs to consumers (or, if you like, more frequent flier miles).

The New York Times' Andrew Martin writes today about Visa's domination of the credit card market, and its growing market share of debit cards.

Martin notes that Visa has promoted signature debit by paying more in fees to banks issuing its cards, boosting their profits — while raising the fees charged to merchants for signature credit. Some stores are now retaliating; Costco requires customers punch in a PIN code rather than sign for their purchases.

Visa leads the U.S. market in signature debit cards, with a 73 percent share; its share of the PIN debit market is smaller (42 percent) but growing.

Stores pay banks on average 75 cents for every $100 spent when customers sign for a debit card purchase, more than twice the fee charged when a PIN code is used. But despite signature debit cards being more expensive and more vulnerable to fraud than PIN debit cards, they account for the majority of debit card transactions (61 percent).

In order to win over banks and get them to issue more cards, Visa (which sets the fees that stores pay to cardholders' banks) has upped the charges merchants make to banks, boosting their profits.

Banks may reward cardholders who use signature rather than PIN with affiliate programs (like frequent flier miles), thereby eliciting the higher signature debit fees.

As debit card use proliferates, critics say Visa is forcing merchants to eat higher costs. Visa, meanwhile, says the convenience of using such cards means higher sales for stores.

And starry eyes for investors: Visa has seen its stock price climb to more than $88. Mastercard's share price has risen more than 450 percent since going public in 2006.

In addition, there is a separate, larger fee (called interchange) that Visa charges stores each time a card is swiped, approximately 1 to 3 percent of each purchase. Stores say because debit cards take money straight from a cardholder's bank account, rather than issue a credit, there should be no interchange fee.

The Times notes interchange fees cost U.S. households on average $427 in 2008, according to the National Retail Federation.

When debit cards were first issued, stores were often paid for accepting them, because they saved the banks from handling check transctions. Now, federal data shows that the fee paid by small merchants for each PIN debit card transactions routed over Visa's Interlink network has risen from 20 cents per $100 transaction in 2002 to 90 cents.

A Justice Department spokeswoman told The Times it is investigating if the rules imposed on merchants by payment networks like Visa are anticompetitive.

To read more of Martin's story on Visa's marketing and merchants' latest lawsuit click here.

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  • David Morgan

    David Morgan is a senior editor at and